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Arbitration between insurance and self-insurance against natural risks
[Arbitrage entre assurance et auto-assurance contre les risques naturels]

Author

Listed:
  • Guibril Zerbo

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

This article studies the effect of preferences on an individual's optimal choice between insurance demand and self-insurance in a risk context and then in an ambiguous context. The innovative idea in this paper is to introduce ambiguity about the effectiveness of self-insurance to understand the nature of the relationship between insurance demand and self-insurance demand. We show that an increase in risk aversion increases the demand for insurance and decreases the demand for self-insurance. However, when risk is introduced on the effectiveness of self-insurance, we show that the individual still prefers self-insurance to market insurance. We also show that when ambiguity is introduced on the efficacy of self-insurance, the individual always prefers market insurance to self-insurance. Finally, we determine the conditions under which the individual's self-insurance effort is higher or lower under ambiguity than risk.

Suggested Citation

  • Guibril Zerbo, 2024. "Arbitration between insurance and self-insurance against natural risks [Arbitrage entre assurance et auto-assurance contre les risques naturels]," Working Papers hal-04755582, HAL.
    • Handle: RePEc:hal:wpaper:hal-04755582
    Note: View the original document on HAL open archive server: https://hal.science/hal-04755582v1
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